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Accretion/dilution analysis is a type of M&A financial modelling performed in the pre-deal phase to evaluate the effect of the transaction on shareholder value and to check whether EPS for buying shareholders will increase or decrease post-deal.[1] Generally, shareholders do not prefer dilutive transactions; however, if the deal may generate enough value to become accretive in a reasonable time, a proposed combination is justified.

## Simple example

### Pre-deal situation

BuyCo plans to acquire 100% shares of SellCo in a stock-for-stock transaction.[2]

BuyCo has a net income of \$300,000 and 100,000 shares outstanding
Market shareprice of BuyCo is \$50.0
Pre-deal EPS = \$3.0
Pre-deal P/E = 16.7x
SellCo has a net income of \$100,000 and 50,000 shares outstanding
Market shareprice of SellCo is \$60.0
Pre-deal EPS = \$2.0
Pre-deal P/E = 30.0x

### The deal

BuyCo agrees to pay a premium for control of 30%, so the offer price for one SellCo share is 1.3*\$60.0 = \$78.0
Stock-for-stock exchange ratio is \$78/\$50 = 1.56 of BuyCo shares for one SellCo share
BuyCo issues 1.56*50,000 = 78,000 new shares to exchange them for all the SellCo shares outstanding
Total shares of NewCo = 100,000 (pre-deal shares of BuyCo) + 78,000 (new shares) = 178,000 shares
NewCo expected EPS = Total net income/Total shares outstanding = (\$300,000+\$100,000)/178,000 = \$2.25
NewCo expected shareprice = (P/E of BuyCo)*(expected EPS) = 16.7x*\$2.25 = \$37.45

### Post-deal situation

EPS of NewCo fall from \$3.0 to \$2.25, so the deal is 25% dilutive for BuyCo shareholders
BuyCo shareholders own 100,000/178,000 = 56.18% of NewCo
SellCo shareholders own 78,000/178,000 = 43.82% of NewCo

## Further analysis

A real-life accretion/dilution analysis may be much more complex if the deal is structured as cash-and-stock-for-stock, if preferred shares and dilutive instruments are involved, if debt and transaction fees are substantial, and so on. Generally, if the buying company has a higher P/E multiple than that of the target, the deal is likely to be accretive. The reverse is true for a dilutive transaction.

## References

 726 videos foundNext >
 Wall Street Prep Lesson 5: Mergers and Acquisitions(M&A) Accretion/Dilution AnalysisI've tried to come up with similar exercise as official Wall Street Prep Course. This video will teach you basics of Mergers and Acquisitions and Accretion/D... Mini Merger (Accretion Dilution) AnalysisPaul Pignataro of the New York School of Finance (formerly AnEx Training) walks through a Mini Merger (Accretion Dilution) Analysis. WST: 14.1 Merger Modeling Basics - Accretion DilutionWall St. Training Self-Study Instructor, Hamilton Lin, CFA calculates the accretion dilution of a merger, one of the most important analyses and end outputs ... Investment Banking Training Financial Modeling and ValuationGlobal Investment Banking Analyst/Associate Program Location: London or Remote/Web Video Conferencing The Global Investment Banking Program is an exciting op... CIBA | Accretion - Dilution Analysis.mov Financial Modeling Quick Lesson: Accretion / Dilution - Part 1To download the model template that goes with this lesson, please go to http://www.wallstreetprep.com/blog/financial-modeling-quick-lesson-accretion-dilution... Financial Modeling Quick Lesson: Accretion / Dilution Model - Part 2To download the model template that goes with this lesson, please go to http://www.wallstreetprep.com/blog/financial-modeling-quick-lesson-accretion-dilution... PEI Services - Deal Flow ManagementM&A Deal Flow Management www.peiServices.com 512-777-1010. Financial Modeling Quick Lesson: Trading Comps (Part 2)In today's lesson, we're going to build the single most common model in investment banking: The trading comparables (comps) model. We will start at the end -... Dilution
 726 videos foundNext >

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